Abstract:&nbspCagan's classic currency ratio suggests that underground economic
activity in the United States surged starting in 1994. In contrast, we show
that a ratio adjusted to take care of two distorting developments --
retail sweep programs and overseas demand for U.S. currency -- did
not surge and that movements in the adjusted ratio to result
primarily from the differential effects of interest rates on currency and checkable
deposits. As a result, we are skeptical of monetary-based claims
that the underground economy has expanded significantly in recent
years and believe that any claims that it has must rely on other
evidence.